IRS issues new final and temporary regulations on outbound reorganizations.

• Author: Granberg, Michael W.

The IRS recently issued temporary and final regulations addressing certain outbound transfers of property, indirect stock transfers, and certain outbound asset reorganizations. Specifically, T.D. 9614, generally effective for transfers occurring on or after April 18, 2013, provides guidance on the requirements to qualify for the exceptions to Sec. 367(a)(5). T.D. 9615, applicable to transactions occurring on or after March 18, 2013, primarily makes changes to the coordination rule applicable to asset transfers and indirect stock transfers for certain outbound asset reorganizations.

Background

Treasury issued proposed regulations in 2008 under Secs. 367, 1248, and 6038B addressing outbound transfers of property under Sec. 361 and certain distributions of a foreign corporation's stock by a domestic corporation. T.D. 9614 contains final regulations that adopt most of the 2008 proposed regulations with some modifications. The final regulations generally apply to Sec. 367(a)(5), which provides that Secs. 367(a)(2) and (3) do not apply to certain transactions described in Sec. 361(a) or (b). However, subject to the conditions provided in the regulations described below, Secs. 367(a)(2) and (3) can apply if the transferor corporation is controlled (within the meaning of Sec. 368(c)) by five or fewer domestic corporations. For purposes of this determination, all members of the same affiliated group under Sec. 1504 are treated as one corporation.

To understand the relevance of Sec. 367(a)(5) and its regulations, it is helpful to review Secs. 367(a)(1)-(3). If a U.S. person transfers property to a foreign corporation in a transaction described in Sec. 332, 351, 354, 356, or 361, Sec. 367(a)(1) provides that the foreign corporation should not be treated as a corporation for purposes of calculating any gain that should be recognized on the transfer. In effect, unless there is an exception, the impact of Sec. 367(a)(1) is to treat an otherwise tax-free exchange as a taxable transaction. Secs. 367(a)(2) and (3) are two exceptions whereby paragraph (1) does not apply. Specifically, Secs. 367(a)(2) and (3) are applicable to, respectively, (1) transfers of certain stock or securities of a foreign corporation that is a party to the exchange or a party to the reorganization and (2) transfers of certain property used in the active conduct of a trade or business. The final regulations contained in T.D. 9614 provide the guidance whereby a transfer of assets by a domestic corporation to a foreign corporation might qualify for tax-free treatment under one of the exceptions in Secs. 367(a)(2) and (3).

Modifications to the Proposed Regulations

The 2008 proposed regulations provided certain conditions under which a U.S. transferor would be allowed to apply the exceptions in Secs. 367(a)(2) and (3). The U.S. transferor can elect to apply the exceptions as long as any net gain realized by the U.S. transferor is either (1) recognized currently or (2) preserved in the basis of the stock received in the reorganization. As noted, the final regulations largely adopt the proposed regulations with some modifications and clarifications as discussed below.

The proposed regulations provided that the calculation of inside gain should take into account liabilities to the extent that payment or satisfaction of those liabilities would result in a tax deduction. In effect, the U.S. transferor is allowed to benefit from liabilities that it has not yet been allowed to claim as a deduction through a...